Category Archives: Payables Finance

David Gustin is the chief strategy officer for The Interface Financial Group responsible for digital supply chain finance and is a contributing author to Trade Financing Matters.

“Ahhh. This porridge is just right.”

— from “Goldilocks and the Three Bears”

The Goldilocks principle is named by analogy to the children's story “The Three Bears,” in which finding the right temperature for porridge took some sampling.

So how do you make sure the porridge is just right if you are today’s middle market treasurer and need to balance liquidity, access to capital (and if rated, a quality rating), and ensuring the right amount of cash?

Most middle market companies are not flush with cash. In fact, when thinking of capital structure, there are many things that keep the CFO/treasurer up at night.

David Gustin is the chief strategy officer for The Interface Financial Group responsible for digital supply chain finance and is a contributing author to Trade Financing Matters.

As we pointed out in our last post, payment companies are looking to convert paper checks to cards, and this is drawing interest from many firms, from private equity investing into payment companies to acquisitions (e.g., Fleetcor acquiring Nvoicepay, Visa buying Earthport). The key weapon of payment companies is to leverage interchange fees to entice their clients (buyers) through rebates and extended terms to provide an early pay option for suppliers, typically with a discount from the invoice of 2% to 3%. Yet there are several reasons why a “card only” strategy from payment companies is suboptimal.

David Gustin is the chief strategy officer for The Interface Financial Group responsible for digital supply chain finance and is a contributing author to Trade Financing Matters.

Few source-to-pay platforms, payment processors or other networks have been able to develop early pay dynamic discounting management (DDM) or supply chain finance solutions that have added significant revenue to their enterprises. (See Why Platforms Need to Monetize Their Supplier Ecosystem.)

This comes at a time when these platforms are building new capabilities to boost revenues, including providing supplier invoice aggregation services; adding payment functionality; and helping clients migrate to cloud solutions.

From my conversations with many S2P platform vendors and payment processors, I hear three buckets of objections:

Today, banks are by far the dominant player in providing supply chain finance, and do so in four ways. And many Fintechs that offer source-to-pay (S2P) and other supply chain collaboration solutions still have a strategy of using their clients’ house banks for supply chain finance. While it makes things easy if the customer can bring their own bank, it does not come without risk.

When it comes to working capital and liquidity today, there are more options than just black. Almost all companies have some form of permanent capital to fund their business operations. Even the smallest companies typically have an overdraft facility or business line of credit with their bank. Larger companies are serviced by an array of conventional (banks, factors, ABL) and non-conventional (asset managers, insurers, specialty finance) financial firms. Until recently, however, the idea of ad hoc working capital to supplement more permanent forms was not a reality, since the combination of technologies such as e-invoicing, dynamic discounting, API integration and supplier portals were being developed along with third-party sources of capital. But through rapid B2B digitization and more widespread deployment of purchase-to-pay and supply chain collaboration platforms, companies now interact with their buyer-supplier ecosystems in new ways that enable and simplify ad hoc working capital.

In the past, most procurement organizations would admit to doing a generally poor job of linking buying processes to the actual receipt of invoices, the invoice approval process and the subsequent payment to suppliers.

But in more recent years, corporations have moved to the cloud for document and data exchange around their source-to-pay processes, driven by factors including the rise of platform-based technologies that drive efficiency and effectiveness in the procurement and accounts payable areas as well as by government tax regulations.

Many invoices still come in via PDF and paper, and require some form of machine recognition. With machine learning, providing scanned documents and automatic extracting offers a way to make instant credit decisions for off-platform funding.

In the real world, you plan for an event and it works out for a while. Then things fall apart. So you react and plan more — hoping to stop the problem from creating a contagion effect.

And here you are, thinking that you built this nice network finance model to finance your suppliers not just on approved invoices, but invoices that have been issued, or even more upstream, purchase orders that have been issued. And things have been working smoothly for a couple of quarters, or maybe for even a year or two.

I often get this question about how factoring and supply chain finance differ from traditional invoice finance. And the real answer is its very murky. There is certainly a blurring between invoice finance, invoice discounting, factoring, supply chain finance and asset-based lending.

By whatever name you want to call it, what really matters is what usury laws are governed by the lending technique and how bankruptcy court will interpret the structure (loan, asset purchase) and what the state or legal jurisdiction laws are in relation to the technique. Definitions are fine to help educate and illustrate, but they are meaningless when it comes to judges and investors.

Whichever way you look at it and define it, supply chain finance has grown into a big number. And if you define it as using the balance sheet of a large company to offer early payment to some or all of its suppliers, it is has gained in popularity. Plus, it’s not only offered by large banks who can both originate and distribute large-scale programs for the likes of Unilever or Procter & Gamble, but also non-bank asset arrangers like Greensill, Seaport and others working together with source-to-pay platforms or directly with buyers to develop programs. And always in the background we have heard this whispering of accounting treatment. And by now, most people who have dabbled in this space know the issue: Is it trade payable or is it debt? Fewer understand the implications.

The crowdsourcing concept called the “wisdom of the crowd” is where a thousand non-experts will make better decisions than the most sophisticated experts in any field. Yet humans are subject to biases in their decision-making. These biases can bleed into the artificial intelligence algorithms we design to try to make us more efficient and effective. Read about the four that we should recognize.

Because P2P solutions started giving away supplier portals, cash flow optimizers, analytics, support, etc., they closed a revenue door. Trying to build a sustainable business model when half your ecosystem is not monetized is very challenging, even as P2P platforms add features and functionality. Sure, many platforms are trying to figure out payments, and that is something that scares the bejeebers out of them due to regulations and compliance rules. (Don’t pay that blacklisted vendor or person, or else.) But payments is not a profitable business for platforms, it’s a service.

How long has this benign credit cycle been going on? How about since 2008, when the Fed began dumping money into the economy to go way beyond its mandate as a last-stop liquidity gap. This has led to many distortions in the credit and capital markets, and one area where this is poorly understood is around “approved” invoices. Despite what many players in the space might believe, underwriting is necessary — even critical. Even though the invoices that are on the platform are, by definition, approved for payment (i.e., highly de-risked), they are by no means risk-free.